Tobacco companies face a shrinking landscape in established markets

Generally speaking, it’s been a miserable go of things lately for tobacco stocks. A number of developed countries have waged war on the industry, given the adverse health effects that can occur from using tobacco. Those worries especially came to a head for investors in April, when global tobacco giant Philip Morris International (NYSE:PM) imploded after delivering worrisome first-quarter operating results.

Even with year-on-year EPS growth of 2% and 8% sales growth excluding currency fluctuations, Philip Morris’ cigarette shipment volume fell by 9.3 billion units, a little over 5%, from the prior-year period, and the company’s iQOS heated tobacco alternative appeared to peak in Japan, which was sort of a test market for the product. Though tobacco stocks traditionally have strong pricing power as a result of the addictive nature of nicotine, demand for their products has been waning for some time.

This leaves companies like Philip Morris and its peers with one of two choices. They can either accept this trend and continue to raise the price of its existing products, or they can innovate. But the thing to remember is that not all innovation has to come from within.

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